Arbitration/Pending Cases: Consumer Car Arbitration Riding on New Treads As Ninth Circuit "Recalls" Opinion in Kolev v. Euromotors West/The Auto Gallery

 

Axle of Evil:  Opinion Withdrawn in Kolev v. Euromotors West/The Auto Gallery Was Critical of Pre-Dispute Binding Arbitration Where Automobile Problems and Magnuson-Moss Warranty Act Are Concerned

     On April 11, 2012, the Ninth Circuit withdrew the Opinion in Kolev v. Euromotors West/The Auto Gallery, 586 F.3d 1024 (9^th Cir. 2011), explaining that it cannot be cited as precedent. This "recall" of an automobile arbitration decision offers the strategic advantage of mooting a petition for rehearing en banc. The parties may still file a petition for rehearing and rehearing en banc – but first the California Supreme Court needs to decide Sanchez v. Valencia Holding Co. LLC, No. S199119 (previously heard by the 2^nd Dist., Div. 1, and published at 201 Cal.App.4^th 74 (2011)). What's all that about?

     Ms. Kolev bought a pre-owned (i.e., used) Porsche that turned out to have serious mechanical problems during the warranty period. Having purchased a car that she believed was a lemon, she may now believe that her court case is a lemming headed off a cliff.

     In the now withdrawn Kolev opinion, Judge Reinhardt, writing for a majority of two, concluded: "We hold that written warranty provisions that mandate pre-dispute binding arbitration are invalid under the [Magnuson-Moss Warranty Act ("MMWA")] and that the district court therefore erred in enforcing Porsche's warranty clause by compelling mandatory arbitration of Kolev's claims." Judge Reinhardt's opinion deferred to FTC regulatory interpretation of the MMWA that IDSMs ("informal dispute settlement procedures" or "Mechanisms" under the MMWA) were not intended to be binding on consumers. The majority opinion also concluded that binding arbitration fails to protect consumers from being forced into involuntary agreements they can't negotiate.

     Judge Reinhardt's majority opinion drew a dissent from Judge Smith, who argued that the majority conflated Mechanisms – a narrow class of warranty dispute resolution procedures – with any ADR remedy adopted in a private contract. Judge Smith also believed the majority view to be "incompatible with the clear federal policy favoring arbitration under the Arbitration Act."

     The state case awaiting Supreme Court review, Sanchez v. Valencia Holding Company, supra, also involves a consumer, an automobile, and arbitration. The opinion of the Second District, Div. 2, was written by Justice Mallano. That opinion concluded that an arbitration provision in the sales contract was unconscionable – regardless of the fact that it also contained a class action waiver:

"the provision is adhesive – involving oppression and surprise – and contains harsh one-sided terms that favor the car dealer to the detriment of the buyer. Because the provision contains multiple invalid clauses, it is permeated by unconscionability and is unenforceable."

     We'll be interested to see whether the fact-driven unconscionability defense in Sanchez survives further legal review, and also whether the holding in Kolev that pre-dispute binding arbitration is invalid under the MMWA is able to avoid a crack-up.